U.S.-Iran war ‘tax’ begins to hit American businesses and consumers

Nick Friedman, co-founder of Tampa-based College Hunks Hauling Junk and Moving, says his business faces a lot of headwinds. While high mortgage rates negatively affect the real estate market, increasing insurance premiums also negatively affect operating costs. Now there is a US-Iran war and a rise in diesel fuel prices, eating into profit margins. But he doesn’t think he can raise prices.

“We’re kind of in a Catch-22,” Friedman said. “Our fear is that if we start raising prices it will hurt our customers.”

He says larger companies could probably get away with adding fees. That’s exactly what some are doing as skyrocketing fuel costs spread through the American economy.

United Airlines and JetBlue increased baggage prices this week. Amazon announced that it will impose a 3.5 percent “fuel surcharge” on sellers.

In a statement to CNBC, Amazon described the surcharge as “meaningfully lower” than taxes imposed by other major carriers. As operating costs increase, JetBlue “regularly evaluates how to manage these costs while keeping base fares competitive and continuing to invest in the experience our customers value,” he said.

According to Friedman, this assessment is not easy. “If you have to fly, you have to fly,” he said.

But as Friedman’s shipping company was considering whether to raise prices, he said, “I don’t know if we have that luxury.” Customers can choose to switch to a cheaper and perhaps less protected moving service, or even pick up a few friends in pickup trucks to help with the move, leaving Hunks’ fleet of 2,000 trucks increasingly idle. However, filling trucks with gas is also an expensive business.

Historically, fuel accounted for 3 to 5 percent of revenues as an expense item, but since the start of the war it has doubled to 6 to 10 percent, Friedman says. “From a business perspective, it’s very difficult,” says Friedman. Hunks operates on a franchise model with more than 200 locations, which puts many franchisees in precarious positions.

While Friedman’s business is uniquely vulnerable due to its reliance on trucking, high diesel and jet fuel prices are about to affect many more businesses.

“Discretionary spending is often where the cycle begins. Consumers pull back from discretionary items first,” said Daken Vanderburg, chief investment officer at MassMutual Wealth.

Vanderburg says higher energy prices act as a tax on consumers because they are reflected in many products and services. If the war and its disruption are short-lived, consumers will turn to savings and bypass higher costs. But a longer conflict will cause consumers to cut back. “This is slowing down growth and affecting spending, and it’s doing it pretty quickly,” Vanderburg said.

While many in the market expected President Donald Trump to address the nation earlier this week outlining an end to the war, his remarks left the timeline unclear and unsettled the market.

Unlike past economic shocks to the system, such as the Great Recession or Covid, the government will have fewer tools at its disposal to cushion the blow to businesses and consumers. “Politics probably isn’t going to the rescue like it was during the Covid era,” Vanderburg said.

The Federal Reserve is caught in its own impasse. The central bank has not indicated that it is more likely to cut interest rates to stimulate the economy, given the risk that it could push inflation even higher. In fact, the market was betting that the Fed would be more likely to raise interest rates given the recent rise in oil prices. However, Fed Chairman Jerome Powell also stated that he sees no reason to consider an interest rate hike this week, noting that short-term oil shocks are a factor that central banks often overlook when analyzing inflation and that long-term inflation expectations are firmly fixed.

General price shock

The U.S. economy is supported by more consumer spending than economies in many other countries, with nearly two-thirds of the economy supported by consumers. Where those dollars go will determine where the economy goes, Vanderburg said. Although the economy was slowing even before the start of the war, he says, there was a buffering factor for American consumers compared to the oil crisis of the 1970s, when they were much less dependent on imported oil. But the pillow can only soften the blow, he added.

“This is heading towards continued and increasing cost pressure in every sector that touches fuel – virtually every sector,” said Herman Nieuwoudt, Head of Energy and Resources at IFS.

What we are seeing now is not a single price shock, Nieuwoudt says.

“This is the result of the largest energy supply disruption in modern history, on top of six years of structural volatility,” he said. “These disruptions are cascading across manufacturing, packaging, agriculture, transportation and retail in ways that will take months to fully materialize,” he added.

Costs will increase across the board, and companies that can see disruptions coming, adapt their operations in real time, and make quicker decisions about where to allocate resources will weather this much better than companies that still practice quarterly planning cycles. But companies that rely solely on surcharges without addressing their own operational efficiencies are likely on borrowed time two to three quarters before customers and competitors are forced into a showdown, he added.

For consumers, Nieuwoudt says the pain at the pump is first, but that’s just the beginning. There will be increasingly higher costs for plane tickets, grocery shopping, shipping costs and manufactured goods.

Economists say the current K-shaped economy is about to become a twin phenomenon; While essentials (airlines, auto repairs) and giants (JetBlue, Amazon) have more latitude to raise prices, small businesses and discretionary services are caught in a vise between raising prices and turning away customers or keeping prices low while sacrificing margins.

Higher airfares shouldn’t come as a surprise. Delta Air Lines CEO Ed Bastian told CNBC a few weeks ago that fares could be increased in response to higher oil prices if necessary, given current demand. “Even as the war continued, our revenues and bookings increased 25% year over year,” Bastian said. In early March, United CEO Scott Kirby told CNBC that higher airfares were on the way to offset rising fuel costs.

“American consumers are resilient, and the current situation is no exception,” said Federico Bandi, professor of economics and finance at Johns Hopkins Carey Business School.

Other brands may not be as lucky as airlines with demand and pricing momentum. Bandi says there is a shift from discretionary spending to needs, and an accelerating shift from brand names to generic products within needs.

“A long-term equilibrium in which companies attempt to pass on unusually high energy costs (or widespread tariffs) to consumers will not be sustainable. The continuation of current shocks and the readiness of companies to readjust prices once costs normalize to some extent will be central to consumers’ confidence and future decisions,” he said.

Economic vulnerability from import tariffs, government shutdowns, and rising health care costs, among other policy changes, led Fernando Lozano, an economics professor at Pomona College, to conclude that “patience is very short” and consumers will have little tolerance for the new fees.

The economics of the shipping industry may be a big test, and consumers may have to choose what is more important: paying more for faster service or saving money by waiting for an order.

“We see the end of the ‘fast and free’ shipping era as a default expectation. Current disruptions are forcing a reset, and what’s emerging is a model based on choice and value,” said Josh Steinitz, chief strategy officer at shipping and fulfillment software company Auctane. Steinitz says the current crisis is pushing both businesses and consumers to rethink the true cost and value of getting a product to their doorstep.

The United States Postal Service charged an 8% surcharge for packages and express deliveries.

According to Steinitz, the best way to think of the fuel surcharge is as a “variability tax” on transportation.

“This is how carriers manage unpredictable oil prices, but for a small business this feels like a new, inevitable cost that comes with every shipment they send,” Steinitz said. Unlike the stability it provides carriers, “when small business owners see the fee on their bills, it feels less like a shock absorber and more like a direct financial impact over which they have no control,” he said.

This leaves business owners and consumers in a quandary.

Friedman thinks back fondly to the days when he started Hunks with friends and an old cargo van at the dawn of the Great Recession. “We were a scrappy startup at that point, and it forced us to be resourceful and bold,” Friedman said. He says the company will now have to rely on the same determination, but the situation is different now with 2,000 trucks to fuel and less room to change margins and prices. “It bothers everyone,” he said.